Distant sound sources in our environment are perceived as externalized and are thus properly localized in both direction and distance. This is due to the acoustic filtering by the head, torso, and external ears, which provides frequency-dependent shaping of binaural cues such as interaural level differences (ILDs) and interaural time differences (ITDs). In rooms, the sound reaching the two ears is further modified by reverberant energy, which leads to increased fluctuations in short-term ILDs and ITDs. In the present study, the effect of ILD fluctuations on the externalization of sound was investigated. A psychoacoustic experiment was performed in a standard IEC 268-13 listening room by normal-hearing listeners. Individual binaural room impulse responses were used to simulate a distant speech source delivered via headphones. The speech signal was then processed such that the naturally occurring fluctuations in the ILDs were compressed, while the ITDs were preserved. This manipulation reduced the perceived degree of externalization mainly for broadband and highpass filtered speech. In the case of lowpass filtered speech, the compression of ILD fluctuations did not affect externalization. Overall, for sounds that contain frequencies above about 1 kHz the ILD fluctuations were found to be an essential cue for externalization.